Few Green Shoots Expected in the Bond Market

Paul Krugman has a chart:

and writes:

Bond panic subsiding?: Over the course of the spring there was a substantial rise in long-term interest rates; it was fed partly by talk of green shoots, but also, I suspect, by all the yelling about deficits and inflation. And, of course, the rise in rates was itself taken as evidence that inflation fears etc. were justified.

But the panic seems to be subsiding. Rates are still well above their post-Lehman lows, when credit markets were completely frozen and everyone was piling into govt. debt. But they’re low by historical standards, and not giving much ammunition to the worriers these days.

On the contrary, they are giving a significant amount of ammunition to the worriers--my brand of worriers, a different kind of worriers. We worry that the next two years are going to bring what happened after the end of the 2001 recession: something like this:

A recovery in which unemployment is higher two years later than when the recovery began is not much of a recovery. And I don't see what is going to keep the probability of such an eventuality low.

The lower are ten-year Treasury interest rates, the more are people trading in the bond market willing to bet their money that the future holds that kind of non-recovery recovery. And so I worry.

Comments

[Lies and Da...:]

but at least when the Option ARM resets happen borrower's will be able to lock in lower rates and result in a lower probability of defaults?.....maybe?..am I being too optimistic?

Jul 09 07:41 AM

[cynewulf:]

In a recession ,low rates certainly give the government a lot more room for stimulus, and as the previous commentator stated that applies to citizens too. If the low rates are an indication that people betting in the bond market don't think much of the recovery so far, it's good that that is reflected in yields. Imagine how hard a recovery would be if yields were higher.

Jul 09 08:48 AM